Stocks end relatively calm day with modest loss

October 03, 2008

NEW YORK — The financial markets saw some relative calm Wednesday as investors uneasily awaited a Senate vote on the banking bailout plan, with Wall Street falling only moderately and the credit markets still showing signs of strain. The Dow Jones industrials zigzagged during the session, losing more than 200 points in early trading but closing down about 20 — far from the huge swings the blue chips saw during the first two sessions of the week.

Many investors were reluctant to make any major moves before the vote expected Wednesday night on a revised version of the plan defeated earlier this week by the House. The new proposal includes tax breaks for businesses and the middle class and increases deposit insurance.

While they waited, the markets absorbed economic data that was a reminder of the impact of the credit crisis that is now more than a year old. In an assessment of the manufacturing sector in September, the Institute for Supply Management revealed a troubling drop in new orders, which portends a continuing slowdown in the months ahead. The trade group’s overall index of manufacturing activity fell to 43.5 in September from 49.9 in August. Wall Street had expected a reading of 49.5, according to economists polled by Thomson/IFR.

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“We’re now seeing in those numbers that we’re getting a contraction in economic activity,” said Jim Dunigan, managing executive of investments at PNC Wealth Management.

At this point in the credit crisis, weak economic numbers are coming as no surprise to Wall Street — but September’s data are expected to be particularly bleak, reflecting the seizing up of the credit markets that began during the month. If the markets don’t show signs of relaxing soon, the reports may well motivate more investors to pull money out of stocks.

“We’ve taken the credit markets for granted much like you do the electricity coming on every day but in this particular case the power grid is down,” said Dunigan. “If we don’t have a functioning credit market banks aren’t lending to each other — credit is dried up. That ultimately affects economic activity.”

Nervousness about debt has made banks hesitant to extend loans; banks have preferred to hold onto their cash. But some analysts and policymakers are worried that drop in lending will curtail economic growth. And the fear paralyzing the credit markets is making it more difficult and expensive for some companies to fund their day-to-day operations, putting basics like payroll at risk.

Anglo-Swiss mining giant Xstrata PLC said Wednesday it was dropping a $10 billion bid for rival Lonmin PLC because of uncertainty about access to credit. And industrial products maker Actuant Corp. lowered its sales outlook because of the credit market distruption.

The London Interbank Offered Rate, or Libor, on overnight dollar loans dropped to 3.79 percent on Wednesday from Tuesday’s record 6.88 percent. Libor measures how much banks are charging one another to borrow. Many consumer lending rates, including about half of all U.S. adjustable-rate mortgages, are tied to Libor.

But overnight Libor remains well above the target Fed funds rate of 2 percent, showing that banks are still tending to hoard their cash rather than lend it.

Demand for the safety of government debt increased Wednesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.74 percent from 3.83 percent late Tuesday. The yield on the 3-month T-bill, the safest type of investment, fell to 0.79 percent from 0.88 percent late Tuesday. The decline in yields indicates that investors are willing to accept even modest returns to protect their money.

Financial markets likely will remain nervous until voting on Capitol Hill is complete. The Dow fell 19.59, or 0.18 percent, to 10,831.07. The blue chip index fell 778 points Monday, its steepest drop in years, after lawmakers rejected the bailout plan, then rallied 485 points Tuesday on hopes party leaders would find the votes to pass the measure.

Light, sweet crude fell $2.11 to settle at $98.53 a barrel on the New York Mercantile Exchange after the government reported a surprise increase in U.S. crude supplies. The dollar was mixed against other major currencies, while gold prices rose.

Charles Widger, chief executive of Brinker Capital, said the bailout would help restore faith in the U.S. financial system. Champions of the plan say it is necessary to absorb the soured mortgage and other bad debt from banks’ books as a way to restore faith in the credit markets, while detractors said the plan was too costly and risky.

“It will help to restore confidence and confidence is the No. 1 issue now,” he said.